🚨 1031 Exchange QI Selection: Protecting Your Exchange Proceeds

[Bruce D. Kowal]

Lots of question, all the time, about finding a QI for your §1031 exchange.  It  can't be stressed enough how crucial your Qualified Intermediary (QI) selection is in a §1031 exchange. Let's talk about protecting your hard-earned equity.

The most critical aspect of QI selection is SECURITY OF FUNDS 🔒

Here's why:

Your QI holds your exchange proceeds during the exchange period

These funds are NOT protected by FDIC insurance

QIs are largely unregulated in most states

If your QI goes bankrupt, you could lose everything

Key Protection Steps:

Verify FIDELITY BONDING 🏦

Ask for proof of current fidelity bond coverage

Confirm the coverage amount exceeds your exchange proceeds

Request verification directly from the bonding company

Check FINANCIAL CONTROLS ⚖️

Segregated accounts for each exchanger

Dual controls on fund movements

Written procedures for fund handling

Treasury Regulations §1.1031(k)-1(g)(4) outlines QI requirements but doesn't mandate specific security measures. This is why YOUR due diligence is essential.

RED FLAGS 🚩

QI offers to pay high interest rates on exchange funds

Pressure to sign documents without review

Reluctance to provide banking/security documentation

No physical office location

Limited staff availability

PRO TIP: The Federation of Exchange Accommodators (FEA) maintains membership requirements including bonding and insurance. While membership doesn't guarantee safety, it's a good starting point.

COST VS. SECURITY TRADE-OFF 💰

Don't choose a QI based solely on fees. Lower fees might mean:

Reduced security measures

Commingled accounts

Limited insurance coverage

Understaffed operations

Remember: Your entire gain deferral under §1031 depends on proper execution. A QI failure could trigger immediate recognition of all gain, plus potential penalties and interest.

#1031Exchange #RealEstateInvesting #TaxStrategy #WealthBuilding #InvestorEducation #DueDiligence #RealEstateSuccess #PassiveIncome #InvestorLife #CommercialRealEstate

[Daniel Osman]

@Bruce D. Kowal

Great post! I couldn’t agree more with your emphasis on security of funds and the importance of due diligence when selecting a QI. The risks of choosing the wrong intermediary can’t be overstated, and your advice on verifying bonding, financial controls, and watching for red flags is spot on.

That said, I wanted to offer a slightly different perspective on the cost vs. security trade-off point. While it's true that some low-cost QIs may cut corners on security or service, that’s not always the case. At Deferred.com, we don’t charge fees for our 1031 exchange services on forward exchanges, not because we compromise on quality, but because of our approach. 

Here’s how we do it:

• Technology-Driven Operations: We've invested in advanced systems that streamline the exchange process, reducing overhead and allowing us to operate more efficiently without sacrificing service or security. This allows us to offer our No Fee Exchange even on smaller deals, (just did a deal last week for a $30,000 parcel of land for free). 
• Float Revenue Model: Like most QIs, we earn some revenue from the interest (float) on exchange funds held during the process. This allows us to eliminate fees for our clients while still maintaining top-tier protections. We will even share interest earnings and pay clients if they have a large transaction. 

Our goal is to make it easy and risk free for anyone to do a 1031 exchange because we think it's the greatest way to legally generate wealth.  

Even without charging fees for forward exchanges (we do charge for reverses and improvements), we prioritize fund security above all else. Our clients’ funds are held in FDIC insured segregated accounts at commercial banking partners with dual controls in place, and we maintain robust fidelity bonding and insurance coverage to provide peace of mind.

I completely agree with your point that cost shouldn’t be the sole deciding factor when choosing a QI because of the risk of a failed exchange. But it’s also important to understand why some companies, like ours, are able to offer no-fee services without compromising on security or service.

Thanks again for starting this important conversation. It’s crucial for investors to be fully informed when making these decisions.